Wednesday, June 10, 2009

Cost saing at what Cost ?

More than six months into the slowdown, India Inc has firmly pressed the cost control button, and this applies to everything from business class travel to lavish parties. No industry exemplifies this change more than the once booming IT industry. Talk to any Indian IT company today and the magic word is 'cost saving'.

Tata Consultancy Services, for example, reduced its operating expenses from 16.37% of its revenues last year to 14.58% of its revenues this year, a decrease of 1.79%. TCS made it work with various cost saving measures it undertook last year. Interestingly during the year some IT companies went to the extent of making it an agenda to save one dollar a day. What paid up for TCS was a reduction in discretionary spending. It saw reduction of costs in software, hardware and material procured for rendering systems integration projects by 0.48% and in recruitments and training by 0.33%. However, it saved the most with reduction in cost of software licences procured by 0.62%. Travel and conveyance was another area where it reduced expenses, by 0.34%. TCS saw its reserves and surplus touching Rs 13,248.39 crore this year, an increase of 22.59% over last year's Rs 10,806.95 crore due to accretion of profits.

The other side of the story is that some of these companies never paid any heed towards costs at all during the boom. Many IT companies extended their limits to retain engineers. Some paid variable components every month instead of yearly or quarterly, while others offered incentives in the form of travel and parties. But it began to change when clients started observing and demanding value for every penny they paid. At one end, margins were hurting, and on the other, increasing expenditures were hurting. IT companies did not only have to then curb lavishness but had to make strategic choices in the way they were hiring and utilising their assets. Like TCS which said it will hire 70% freshers going ahead, a strategy it never tried before but that is paying off well for the company.

It seems the global economic slowdown may perversely come as a blessing in disguise for some companies that are finally beginning to view cost savings as a constant endeavour.